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Home--News
India May Soon Boot Out as a BPO-Perfect Nation
Arindam Mukherjee
Outlook India
May 28, 2007
At least one leg propping up the Indian BPO success story is buckling
under the reality vs hype pressure.
The coming months may see a slightly pessimistic chapter written as
part of the Great Indian Offshoring Tale. There will certainly be
a shakeout as business process outsourcing, where western firms shift
operations to fully-owned units in low-cost hubs like India, becomes
less attractive to global players. India's sunrise service sector
may well see the setting sun soon.
If you think we are exaggerating, here's a reality check from Forrester
Research. In the last few months, several leading MNCs have shut down
their Indian captive centers. A clutch of global firms like GE, British
Airways and Citibank have already sold off their BPO subsidiaries.
And others like Microsoft, Cisco and Texas Instruments are outsourcing
the less critical work to third parties, instead of their Indian campuses.
The bitter truth is mncs are increasingly logging off from India.
Several studies indicate that a majority of MNC-managed captive centres—in
areas like product engineering, R&D, IT and other BPO services—are
facing grave problems. Agrees Sudin Apte, senior analyst & country
head (India), Forrester Research, which came out with a report, 'Shattering
The Offshore Captive Center Myth', last month: "Over 60 per cent of
the captive centers are struggling due to lack of management support,
spiralling costs, attrition and integration issues."
A report by Zinnov, a US-based firm, states that while global IT firms
set up internal campuses in India because of factors like cost savings,
availability of a rich talent pool and capability to execute large
projects, the reality was different. Explains Pari Natarajan, CEO
and co-founder, Zinnov: "In the last 12 months, there has been a tremendous
cost escalation for manpower and infrastructure. This is making it
difficult for global firms to run small operations profitably."
Initially, when the MNCs decided to set up captive units, they underestimated
India's cost structure and, hence, the operational expenses. What's
more, consultants puffed up projections, keen as they were on overselling
the India BPO and offshoring story. As an analyst in a leading IT
firm says, "Many consultants just wanted to get the projects to India,
and overindulged in their estimates."
Such calculations, feels Forrester Research, led global firms to believe
that there were savings to be made not just in skilled labour, but
everything else like infrastructure and other fixed costs.
Thus they thought that actual savings were much higher. A double whammy
hit them when costs rose sharply in the past two years. For instance,
salary hikes are among the highest in software and BPO segments and
real estate prices have zoomed even in the small towns.
Apple officials contend that the decision to close down the company's
captive unit in India was taken at the US headquarters. They admit
that the company—in true Apple style—hired people from the higher
levels, matching their salaries, which were quite fat. But, as one
of the officials says, "somewhere down the line, they realised that
sustaining it would be a problem. So before it could take off, it
was called off." The officials add most of Apple's support and services
work has been handed over to Transworks.
Explains a spokesperson at Motorola which, according to Forrester
Research, is using third parties for least-strategic work. "We have
consistently developed India as a global R&D hub since '91, long before
it became fashionable. And there has never been a slant on outsourcing
work to India because of cheap scientific manpower. We are, therefore,
markedly different from anyone else in this space. India is, and will
continue to be, a key centre for its high-end R&D operations globally."
Reason: it wants to rigidly control sensitive operations, but finds
it unattractive to manage low-end ones.
While costs are important, there are other factors forcing a rethink
among mncs. One, India has a high rate of attrition, coupled with
low productivity levels. A recent Nasscom study on IT and IT-enabled
services (like BPO and call centers) found that the annual attrition
rate is as high as 30 per cent. Industry experts point out that attrition
rates in MNC-owned captive centres are higher at 30-40 per cent. This
makes it more expensive for MNCs as they have to either keep a huge
bench (a waiting pool) or consistently hire HR consultants to hire
new sets of employees.
Productivity too is low in Indian units, when compared to nations
where the mncs are headquartered. According to Zinnov, staff productivity
at offshore centres like in India is 50-60 per cent lower than that
at the onsite units located in parent countries. Explains Natarajan:
"For many firms, there's a mismatch in the productivity between their
Indian and US teams." Experts add that captive units are further burdened
with a poor delivery record, operational problems, a lack of scale
and poor morale.
All the same, the champions of offshoring don't see any cause for
concern. Says a confident Kiran Karnik, president, Nasscom: "There
is no generic issue for captive centres to shut down. A few of them
have because of reasons specific to them, and which doesn't make us
uncomfortable. Some countries like the Philippines, South Africa and
Vietnam have cost advantages. But if you look at other important factors
like quality of service, flexibility, data protection and ability
to scale up, India is way ahead."
Raman Roy, CMD, Quatro BPO Solutions, who's also considered to be
the initial writer of the Indian BPO story, feels the gap between
the US and Indian salaries is actually growing, and not narrowing.
He adds that "productivity concerns are not true" and the Indian levels
"are quite high". But both Roy and Karnik accept that the time taken
to achieve certain benchmarks may be more because of the "larger training
time" or "the time taken for the learning curve to set in". But they
don't see it as a major issue.
More importantly, Roy says there is no need to worry as the captive
centre model is undergoing a change. "It is giving way to third-party
outsourcing as it is a better model that's available at a lesser cost,"
he explains. According to him, British Airways, GE, American Express
and Apple have adopted this model."Looking ahead, it is clear that
multiple models will coexist but the predominant one will be the third-party
one." Therefore, offshoring will continue as the work will go to other
Indian firms.
But that may not turn out to be the full plot. In the near future,
predicts the Forrester Research report, 10 per cent of the MNCs' captive
units will shut down, 20 per cent will adopt a hybrid approach by
using third parties for less critical work and outsource strategic
work to their Indian campuses, 10 per cent will sell out and completely
give out work to third parties, and almost 50 per cent were likely
to follow a "termite strategy", that's go slow on their plans and
gradually exit.
The last category can then outsource its operations to any other country,
which may emerge as a competitor to India. Already, East Europe, East
Asia and China are emerging as threats vis-a-vis costs. More importantly,
Russia is perceived to be more productive than India. Says a senior
manager who has worked in both countries: "Russia is where India was
a few years ago. At that time, Indians worked harder, for more hours,
and at low salaries. Today, Indians think they can command any price."
So, will India's outsourcing narrative end like Ireland's, which lost
out? Or will it turn out to be like Israel, which quickly climbed
up the value chain to offer quality services and, obviously, earned
unbelievable margins?
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